The IMF has once again given Greece's bailout program its stamp of approval, forecasting the debt-beleaguered country will return to growth in 2014 after more than five years of severe contraction.
The International Monetary Fund has once again given Greece’s bailout program its stamp of approval, forecasting the debt-beleaguered country will return to growth in 2014 after more than five years of severe contraction.
But for some, it’s déjà vu, potentially a repeat of the bailout’s troubled history.
The IMF admitted its original 2010 bailout program for Greece served as a “holding operation” that allowed the euro area to fortify itself against financial disaster.
Now, the fund’s positive growth outlook could buy a few more months for euro zone politics, potentially paving the way for a desperately-needed restructuring of Greece’s debt.
In its latest in-depth review of the joint IMF-euro zone bailout, the fund says Greece should grow by 0.6% next year, rebounding from a 4.4% contraction this year. That’s based on a forecast for revival in consumption and investment and the government moving forcefully ahead with promised economic and budget restructuring.
Poul Thomsen, IMF’s mission chief to Greece, says the fund’s forecast isn’t overly-idealistic. Still, he admits, “there are clearly downside risks” to the outlook.
Not all are as sanguine, and it’s questionable whether the tactics will work. At least one executive director suggests the fund should have already drafted contingency plans for another collapse of the Greek government.
“Recent developments in Greece confirm some of our worst fears,” said Paulo Nogueira Batista, the IMF board member for Brazil and ten other member countries, in a statement to the board.
“Implementation has been unsatisfactory in almost all areas; growth and debt sustainability assumptions continue to be over-optimistic,” he said. Mr. Batista abstained from the latest bailout decision.
At EUR1.7 billion, the IMF’s latest tranche is paltry compared to the euro zone’s share. But more than its cash at this point, the IMF’s real aid is giving the bailout a measure of credibility. Right now, that’s needed in both Germany and Athens.
With a razor-thin majority in parliament, Greece’s ruling coalition hopes to hang on to power despite rising unemployment and reform fatigue until after German elections in September. Once that political hurdle is crossed, Greece hopes Berlin will finally allow negotiations on the politically-sensitive issue of cutting the value of Greek government debt held by the currency union’s members. The IMF says debt relief is vital to ensure Greece’s economy doesn’t drown.
One of the primary ways the IMF has been able to keep the program credible, at least on paper, is by forecasting growth scenarios that have consistently ended up being overly optimistic. Higher growth forecasts help assume more revenues, covering over failures to cut spending and offsetting a financing gap that would prevent IMF lending.
The IMF’s growth projections for Greece have consistently been way off target. In March last year, for example, the IMF estimated Greece would exit a severe recession this year. The reality is a fifth consecutive year of contraction that was originally only supposed to last two.
By forecasting a return to growth next year, the fund may once again be using its bailout program as a “holding operation.”
It’s a uniquely risky gamble for the IMF. If the fund has bet wrongly that Europe will continue financing Greece, including through a debt restructuring, the IMF and its members might be on the hook for up to $35 billion in loans owed by Greece.
“If the program were to go irretrievably off-track and euro area member states did not continue to support Greece, the capacity to repay the Fund would likely be insufficient,” fund staff said in the latest bailout review.
It also makes the financing gap and needed debt reductions smaller and politically more palatable for the euro zone.
The IMF says Greece will need at least EUR4.4 billion in extra financing for 2014 and EUR6.5 billion in 2015 from the euro zone. It also estimates Greece will need debt relief from the euro zone worth 4% of the country’s output to reach its debt target for 2020. Both numbers are likely to be much higher if growth is lower than current forecast by the fund.
Mr. Batista, meanwhile, said the IMF’s outlook for Greece’s debt “seems all but a delusion.”
